Rolls-Royce’s next CEO doesn’t need to have an aerospace background, but must be able to restore the engineering group to status as a profitable icon of British industry, according to its chairman Anita Frew .
The FTSE 100 industry group is in the process of choosing a successor to Warren East, who will leave at the end of the year after leading the group since 2015.
In an interview with the Financial Times, Frew credited East with setting Rolls-Royce on its strategic path to net-zero emissions, but said it was now time to look at “the more granular path of how we go from A to B” in the execution of the plan.
“How much capital does that require and how are we going to deploy that capital in businesses in a way that really produces returns,” she added.
Frew, who became the first woman to chair the 116-year-old group last October, said the new CEO needed to “become a British industry icon again, but profitable”.
Rolls-Royce has already drawn criticism from industry experts for recruiting executives from outside the aerospace sector.
Frew, who is also chairwoman of chemical group Croda and has never worked in industry herself, said that “it must be someone who is used to a large, complex global industrial enterprise. I don’t think it has to be aerospace. The board doesn’t think it should be aerospace.
The company surprised investors in February when it announced that East would leave at the end of 2022. His tenure has been marked by a series of crises, several of which he inherited, including corruption allegations which the group settled, before the coronavirus sent Rolls-Royce. free fall. In 2020 it embarked on a massive restructuring plan to cut 9,000 jobs and had to shore up its balance sheet with £7.3bn of new equity and debt.
Although its 2021 results revealed the company was back in the black and ahead of its restructuring targets, East’s departure has unnerved investors.
Rolls-Royce’s recovery was also held back by global supply chain issues and a slow rebound in some key segments of the airline market. Its engines power wide-body jets and the recovery of long-haul traffic has lagged that of narrow-body short-haul aircraft, a dynamic that has contributed to the group’s 32% share decline this year.
Frew says that while East’s successor may not need aerospace experience, he will need to understand “where the hidden challenges lie” at Rolls-Royce given the scope of its business, manufacturing and servicing aircraft engines to managing its power systems operations.
“We have an OEM activity, an after-sales activity, an energy activity, project activities and companies. They all have different business and operating models and all have different ways of delivering a return,” she said.
The company has whittled down what was a long list of potential successors to a shortlist which includes non-UK nationals.
Frew declined to comment on the identities of the contestants. Industry executives whose names have been linked to the job include Tony Wood, the former head of Rolls-Royce’s civil aerospace business and current head of Meggitt, as well as Graham Chipchase, Brambles boss and former CEO by Rexam.
Nick Cunningham, an analyst at Agency Partners, said the next CEO should be familiar with the aerospace industry. “You have to be involved in the aerospace industry and understand it well. Investment cycles are so long.
The new CEO will have to bring Rolls-Royce back to full financial health and confront the existential threat decarbonization poses to a business built on hydrocarbon-powered engines. Under East, the company invested in electric planes and small modular nuclear reactors. It has delivered on the promise of combined annual revenues of these £5billion by the early 2030s.
Several analysts and investors, however, remain skeptical and believe that the company’s immediate priority should be to improve the performance of the civil aerospace division. Before the pandemic, around half of Rolls-Royce’s annual underlying revenue, then £15.4bn, came from civil aerospace – a share that has since fallen. Today, more than half comes from its defense business and the power systems whose engines help propel ships and trains.
Frew said: “Whatever happens, we need to improve the performance of civil society. . . It’s the big beast of the company and it’s the one that really moves the needle.
Rolls-Royce makes most of its money from long-term service agreements on its passenger aircraft engines when they are in use. Engine flying hours will return as the broader aviation recovery gathers pace – Rolls-Royce said this month they were up 42% from a year ago.
Frew stressed that the civilian business must implement its medium-term plan to grow with “high single-digit margins and low double-digit revenues” and signaled a strong stance to ensure that costs incurred during the pandemic wouldn’t come back.
Causeway Capital Management, a major Rolls-Royce shareholder, last year called for broad renewal and said the company should consider the future of its power systems business in the medium term. The business still relies in part on diesel engines. Frew said the company had to manage the transition to new technologies but the division’s backlog was “substantial”.
The board, she added, would review each of Rolls-Royce’s businesses and consider how best to create value, including from its fledgling power and nuclear businesses.
“We are going through this process in order to have the raw material to start making some of these decisions; because we can’t do it all and some of these businesses are really capital intensive. So when a new CEO comes in, we can start thinking about value creation,” she said.
“Now that doesn’t just mean jumping to sell Power Systems. . .[But] Does this mean a partnership? Same in civil. We have a history of partnerships across many areas of the business, and so there are a lot of options around,” Frew added.
One of the biggest strategic decisions that Rolls-Royce’s new management team will face will be to attempt to re-enter the narrow-body aircraft market given its limited resources and lack of capital for manufacturing gasoline engines. large volume. The company exited the market nearly a decade ago when it pulled out of a joint venture with Pratt & Whitney of the United States.
Rolls-Royce previously said it would stop investing in its UltraFan engine technology program when testing ends this year. The company was counting on him to return to the narrow-body market, but neither Airbus nor Boeing are currently developing a new aircraft.
Partnerships will be the way to go, Frew said. “If we want to get back into this market, we’re partnering with someone.”
His immediate task will be to choose the next CEO and ensure that the focus on operational performance imposed by the pandemic is not lost.
“We must not lose sight of [of that] and we must not leave [cost] slip again. We just have to keep our foot on the momentum pedal.